NACM Survey Shows Credit Not Typically Part of Revenue Forecasting

NACM's July Survey indicated that credit professionals and their departments aren't typically involved in their company's revenue forecasting, but that they do make predictions on other more silo-specific figures.

When asked, "Does your company's credit department provide revenue projections to upper management, or at least participate in the company's revenue forecasting process?" 62% of respondents answered "no" while only 34% said "yes." Despite the lopsided results, many participants noted that while projecting revenue doesn't fall into their department's wheelhouse, forecasting other measurements like days sales outstanding (DSO) and expected bad debt often do. "We don't provide revenue forecasts per se, but we are involved in forecasting accounts receivable because of multiple credit terms," said one respondent. "We also forecast DSO."

When it happens, a more accurate way to describe credit's involvement in forecasting would be with cash flow rather than revenue. "While revenue forecasts begin with the sales forecast, the timing of the revenue is extremely important for cash flow planning," said one participant. "We don't actually forecast sales revenue, but we do project incoming cash on a monthly basis," said another. "We also provide large numbers of customer prospects with pre-approved credit availability."

These projections often become one part of a larger financial tapestry that's presented to a company's upper management at regular intervals, many observed. "We provide projections for A/R balances and cash collections based on sales forecast, which is volume-based," said one respondent. "Sales provides volume projections and we apply average pricing to those to generate estimated sales and associated receivables based on collection percentages and DSO assumptions."

Many other survey participants noted that the forecasting process was often something conducted solely within the higher echelons of their company's leadership. "This is only at the senior finance level," one respondent said. "That is handled by our CFO, controller, marketing and sales VPs," said another.

Others noted that they planned to get involved with forecasting in the near future. "I have only been here three months, and have not been involved as of yet," said one participant. "It is something that I intend to do once I get a better idea of our collection rates."

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Despite bad news in parts of Europe that earlier this year were signaling strong recoveries, the global economy seems to be off to a solid start in the third quarter, according to analysts.

The JPMorgan Global All-Industry Output Index (aka: the Manufacturing & Services PMI), produced along with Markit Economics, showed the slightest of upticks from June to 55.5 (50 is the dividing line between growth and contraction). The story for July's data was one of a surge in the service sector, which showed the fastest growth since April 2010. Although manufacturing production slid slightly, new order inflows and the potential for more in August and beyond leaves little concern for the sector.

"Taken together, the July surveys point to global GDP growth running well above its trend in the third quarter," said Joseph Lupton, senior economist at JPMorgan. He added that the statistics represented "a welcome relief following the disappointing first half of the year."

Markit's US Manufacturing PMI shows a strong rate of manufacturing output growth, holding close to the 50-month high set in June. Interestingly, the numbers are surging despite softer export order growth, which could pose a short-term problem domestically as 2014 drags on.

"With overseas worries likely to hit demand in key export markets, and exports having already stagnated in the past two months, overseas trade looks likely to continue to act as a drag," said Markit Chief Economist Chris Williamson. "But it's also great to see the manufacturing upturn being led by strong demand for business equipment, which implies that the recent investment upturn continued in July and should likewise help to boost third quarter GDP."

The Markit Eurozone Composite PMI rose to a three-month high (53.8) in July, but optimism is not plentiful amid a "lack of clarity regarding the economic situation," unrest in the east and south of the continent, and high unemployment levels in many areas. Though Germany and Spain each reached three-month highs, Italy took a step backward and France continues to operate in contraction territory (49.4), the only one of the zone's four biggest economies doing so in July and the previous month.

As for emerging markets, China's Flash Manufacturing PMI showed total new orders at an 18-month high, suggesting some of the "mini-stimulus" measures are starting to have an impact. But, as is also the case in India, the service sector continues to offset any production gains there. All-industry output was a mixed bag elsewhere: Brazil contracted and the increasingly volatile Russia saw growth surprisingly accelerate in July, according to Markit.

- Brian Shappell, CBA, CICP, NACM staff writer

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Anti-Money Laundering (AML) enforcement has ramped up over the course of the last decade, and regulators continue to issue new rules that govern how financial institutions and companies ensure that their customers are operating legitimately. Most recently, the US Treasury 's Financial Crimes Enforcement Network (FinCEN) proposed new rules under the Bank Secrecy Act (BSA) to help prevent the laundering of the proceeds of illegal activity into the US financial system by anonymous companies.

Criminals will disguise their ill-gotten gains behind the veil of a company, and many do so anonymously in other countries around the world, making it much more difficult to actually tie any money or illicit activity back to an actual individual, or group of individuals, who can be prosecuted. FinCEN's latest regulatory proposal would clarify and strengthen the due diligence requirements that banks and other covered financial institutions must complete on their customers, specifically adding a new criterion that these entities know and verify the identities of the real people, known in regulatory-speak as "beneficial owners," who own, control and profit from the companies they service.

"The beneficial ownership requirement is intended to provide us with an important new tool to track down the real people behind companies that abuse our financial system to secretly move and launder their illicit gains," said David Cohen, Treasury Under Secretary for Terrorism and Financial Intelligence. "Along with meeting our international commitments, this rule would make our financial system more transparent by exposing the activities of illicit actors who will no longer be able to hide behind their anonymity."

Cohen's reference to meeting the nation's international commitments pertains to the G8 Action Plan for Transparency of Company Ownership and Control, which was published in June 2013.

The rulemaking might eventually become a legal prerequisite for banks and financial institutions, but in its currently proposed form, it's a potent and important reminder for any business, financial or not, on how to avoid running afoul of similar AML regulations by knowing everything possible about a customer's ownership. In particular, the rule clarifies that customer due diligence includes four core elements: identifying and verifying the identity of customers; identifying and verifying the beneficial owners of legal entity customers; understanding the nature and purpose of customer relationships; and conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

- Jacob Barron, CICP, NACM staff writer

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Studies: 'Bullish' International Business Outlook at US Firms Despite Threats

A pair of studies released this summer indicates that US-based businesses have much reason to believe in international market growth in the next year or two, even if forecasts are not without significant potential challenges.

The Wells Fargo's International Business Indicator shows that 69% of US businesses already conducting business abroad expect activity to increase, in some areas significantly. More than half of those polled also believe international business activity has become critical in order to maintain comfortable company profit margins. An area drawing increased positive attention is Latin America, particularly Mexico. While there is also expected growth in Canada and the Asia Pacific region, Mexicoâ€™s advantages (proximity, familiarity, labor costs) appear hard to counter through late 2015.

Concerns threatening the forecasted international success, according to respondents, include ongoing political tensions in the Middle East and Eastern Europe. Ever higher on the list of top concerns are the regulatory environments both in the US and trading countries.

A Fitch Ratings "Credit Outlook" report from late July also finds positive moment. Its analysts indicate the economic recovery continues to take hold in most key markets. While there is concern about inconsistency in some European nations' recent growth, Fitch Ratings finds that the crisis in Europe is long past its "acute phase." It was also encouraged by positive forecasts out of Germany and previously struggling Spain. Fitch noted that, even as emerging markets show less luster than earlier in the decade, growth levels are expected to rebound by as much as an added half-percentage point over the next year or so.

Like Wells Fargo, Fitch highlighted volatile levels of geopolitical risk in areas like the Ukraine-Russia border region, Thailand and the Middle East as warranting close attention from a global credit perspective. Wells Fargo appeared most upbeat about the 24-month prospects for the US, United Kingdom and, to a lesser extent, Japan and China.

- Brian Shappell, CBA, CICP, NACM staff writer

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The US trade deficit fell to its second-lowest level of the year in June, mostly on the sizable shift in import activity.

The US trade deficit in June tracked at $41.5 billion, down from the previous monthâ€™s $44.7 billion, according to the US Census Bureau and Bureau of Economic Analysis. Total June exports reached $195.9 billion, a $0.1 billion increase, and imports registered at $237.4 billion, a near-$3 billion decline.

The US imported far less in automotive vehicles, parts and engines as well as in petroleum products, amid a continued surge in domestic energy production. Consumer products also showed a sizable dip in demand for the month, particularly with items like smart phones.

The US saw its biggest trade surplus continue with Hong Kong, at $3.1 billion. Other nations with which the US holds a significant surplus are Australia, Singapore and Brazil. China, at $30.1 billion and climbing, continues to dominate the list of nations where the US finds a trade deficit. The European Union comes in at second with only slightly more than one-third that amount, and Japan lags behind in third.

A new survey from KPMG International found that senior bank executives are focusing on improving the customer experience to regain market share lost over the last few years to their non-traditional lending competitors.

KPMG's 2014 Banking Industry Outlook Survey polled 100 senior banking executives and depicted an industry that was aiming to remake itself at the strategic, operational and structural level. "The banking industry is at a critical juncture where it needs to transform on a number of frontsâ€”most importantly, upgrading old and implementing new technology to enhance and simplify the customer experience," said Brian Stephens, national leader of KPMG's Banking and Capital Markets practice. "In addition to tougher competition and regulatory demands, consumer dynamics and preferences are evolving. In order to compete and succeed, banks need to become more advanced and agile to effectively meet customer expectations."

Past surveys found that, largely since the recession, banks changed their business models to accommodate the increasingly tighter regulatory landscape, rather than to better serve and retain customers. Now, however, executives indicated that the next transformative stage will be driven by customer demand, with 47% of respondents citing "customer demand/changes in customer focus, buying patterns and preferences" as one of the top three drivers of transformation for their business over the next three to five years. Forty-three percent cited "coping with the change in technology" and 37% chose "domestic completion" to round out the top three.

Regulation remained as the top barrier to bank growth among survey respondents, but at a much lower percentage than in prior surveys. Only 41% of those polled cited regulation as the top barrier, compared to 72% that did so in 2013. As far as revenue growth is concerned, 32% of respondents said that asset and wealth management will be the top revenue growth driver over the next one-to-three years, followed by commercial and industrial loans at 28% and capital market activity at 21%.